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March 02, 2009

What Does Coventry Do Best?

Writing about web page http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/

Last week, the Economic and Social Research Council awarded a £3.6m contract to the University of Warwick for a centre on Competitive Advantage in the Global Economy.

This seems a good moment to ask, where is Coventry's competitive advantage? What do we do best today? At a time of recession, when many are losing what little sense of security and prosperity they had, what is our city's future?

I arrived in Coventry in 1974. At that time, Coventry was England's motor city -- its Detroit. A friend told me half the city's population belonged to two trade unions, the transport and general workers and the engineers. I don't know if that was true, exactly, but it certainly felt like it.

Between then and now, Coventry has not had it easy. In a way that is nothing new; Coventry's industrial history has seen continual change, from ribbons and watches to bicycles, munitions, machine tools, motor cars, and synthetic fibres. But in the 1980s deindustrialization hit our city hard. The great vehicle building and tool making factories melted away. Employment and wages sagged. Then, other jobs sprang up. Coventry recovered.

What has taken the place of manufacturing? Coventry has a new competitive advantage. It sells to an international market. In the current downturn this market is proving resilient so far: in fact, while global demand for everything else is falling off the shelf, the market in which Coventry is now competing is rising against the trend.

Leading this trend are new corporate giants that have grown up stealthily among us. They are local firms, with their roots are firmly bedded in our region, but they already export a large fraction of what they make.

What are they? The new giants are our city's two universities, Coventry University and the University of Warwick. (For those reading this column at a distance, the University of Warwick is nowhere near the town of Warwick; it is on the edge of Coventry, half in the city and half in the fields of Warwickshire. Coventry University is right in our city centre.) The two universities are not only among our city's biggest employers. Their combined corporate revenues come to around £500 million a year, or nearly £1,700 for every one of Coventry's 300,000 residents. 

The universities are part of a bigger picture. Around them, and not only because of them, a new economy has sprung up; according to the West Midlands Regional Observatory, knowledge-based activities now employ half of Coventry's working population.

Coventry once had a competitive advantage in engineering things. Now, what Coventry does best is the engineering of ideas. At one time, half of Coventry bashed metal; forty years on, half of us bash keyboards. Science and technology parks have sprung up where engines and car bodies were once assembled in giant hangars. The toilets are a lot cleaner, even if the language is just as filthy.

Like the motor factories they have replaced, our universities are big exporters. Instead of selling metal fabricates, they sell and certify knowledge and understanding. One difference is that the customer comes here to collect. Every year more than 10,000 students arrive from continental Europe and beyond to study in our city. The typical international student is likely to pay around £6,000 in annual fees and spend another £6,000 in annual living costs. That would make their total contribution to the economy of Coventry and its South Warwickshire hinterland, and to our national export revenues, £120 million a year and rising. 

The demand for higher education has an important feature that makes it different from the demand for motor vehicles -- it moves against the business cycle. When the economy booms and there are many vacancies, young people entering the market are tempted straight into employment. When the vacancies evaporate, they enroll for courses in order to improve their chances when things pick up. Right now, both our universities are experiencing a small boom in admissions, particularly to courses in management and economics. (Unfortunately, they are also suffering from the slump in everything else from the arts and entertainment to the conference trade.)

How can Coventry make the most of its future? Good management of our universities is important, but it is not the only thing that matters. The poor management of the British motor industry has been criticized, but would better management have saved Coventry's industrial past? It seems unlikely. At best, the decline might have been postponed by a few years.

More important is to understand how our future will remain bound up with the global economy. The international recruitment of academics and students is vital to the competitiveness and prosperity of Coventry's knowledge sector. That's obvious. Less obvious may be what follows.

If we are to maximize our new competitive advantage, and so focus on what we now do best, we have to let others do the same. One country can't do everything best. Today, we are best at science and education. If we are to put our resources into that, then let others exploit their competitive advantage in making the textiles and machinery we used to make and now buy from elsewhere.

Sometimes people feel bad about buying cheap clothes from abroad. There's a "Buy British" lobby that works to make us feel guilty when we do this. We should resist it; it is bad logic. Buying British would mean chopping out the roots of Coventry's knowledge economy just when we need it most.

Think about this: if students from Austria, Bangladesh, China, Dominica, Ecuador, and the rest of the A to Z of nations are to come to Coventry to be educated, their families or governments must have the pounds to pay for them. They can have these pounds, only because we are willing to buy the goods that they make cheaper than we can. When we buy their stuff, we enable them to buy ours. It's a virtuous circle: by trading, everyone can do what they are best at. When everyone is free to exploit their competitive advantage, everyone gains! There are not many such virtuous circles in this world, so we should make the most of them when we find them.

Whatever we do, times are going to be hard. It looks like our political class is going to let us down; obsessed with blaming the bankers and each other, they are failing to do elementary things at home (enacting a fiscal stimulus) and abroad (coordinating fiscal action) that would rapidly improve our situation. To turn our face away from the world, from our competitive advantage, would just make our future harder still.

For the time being, Coventry's future lies in the global knowledge economy. It is what we do best. It is another chapter in our history, one that is still being written.


February 17, 2009

Automatic Destabilizers

Writing about web page http://www.coventry.gov.uk/ccm/content/chief-executives-directorate/corporate-policy/communications-team/news-releases-2009/coventry-residents-set-for-44p-a-week-rise-in-council-tax.en

The day after Leeds City Council announced the loss of 650 local authority jobs because of "lower government grants and the economic downturn," it's Coventry's turn. According to a news release on Coventry City Council's website, our city faces a "budget gap" of £13.5 million. More than £9 million of savings have been identified. These include, in addition to "efficiency reviews of services," "a £469,000 reduction in publicity and advertising budgets, 3% cuts in grants to voluntary organisations and £530,000 through increasing charges in some social care services." It is expected that 190 posts could disappear. Councillor Kevin Foster, Deputy Leader of Coventry City Council, is quoted:

The Council, like all councils, is facing a number of challenges over the coming year. Clearly the recession is having a major impact on our finances ...

Oddly enough, this is not what is supposed to happen in a recession.

As I wrote here, faced with the current collapse of aggregate demand, "the government faces a bitter choice. It can stabilize its budget, or it can stabilize the economy, but it cannot do both." The recession is plunging the budgets of central and local government alike into deficit. Stabilizing the budget means cutting government spending and jobs as revenue falls. Stabilizing the economy, in contrast, means maintaining spending and jobs, borrowing to cover the widening budget gap. In the interests of us all, including the interests of tomorrow, the government should choose the latter course.

In theory, some stabilization of the economy should happen automatically. In our economy, taxation is progressive; this means that, when personal incomes fall, the government's tax take should fall more than proportion. As a result, personal incomes should fall by less than the country's national income, and this should to maintain spending and employment. Part of what the government spends is also progressive: as jobs and family incomes fall away, the government should automatically replace part of what is lost by meeting entitlements to unemployment benefits and other income support. These "automatic stabilizers" don't make things better. They just make things a little less bad than they would be otherwise.

Think about that word, "otherwise." It means: in the absence of the automatic stabilizers. If, say, the government always spent every penny it received, but never more, the government would continually add to the natural volatility in the economy. Every time there was a boom, the government would experience a rise in its revenues and, by rushing out to spend them, heighten the boom. Every time there was a slump, the government would respond to its lost revenues by spending less and so deepening the recession. It doesn't just sound like a bad idea: it is an absolutely terrible idea.

Yet this idea is currently being put into effect by local authorities up and down the country. As property values and business and personal incomes fall, city councils are losing revenue from council taxes and charges. At the same time, for exactly the same reason, local claims on services and benefits are growing. But our cash strapped cities not only cannot meet these rising demands; they must cut back provision.

Rather than mitigating the jobs crisis, they are adding to it and deepening it.

This is the result of a policy failure on the part of central government -- a failure of scandalous proportions. While Westminster plays the blame game -- who should be punished for the failures of our banking system? -- the real economy is sliding down into depression. The solution is well known: a strong fiscal stimulus. But, while Westminster talks, what our country is actually experiencing is the exact opposite: a powerful fiscal brake that is spread by the collapse of local government finance and adds to the burden on us all.

The failure is scandalous because the solution could be put into effect overnight. The Treasury must promise now to stabilize local government funding at its pre-recession level. Local authorities should be enabled to plan for the future without adding to the pool of the unemployed. When the economy recovers, the additional subsidy from the centre can be gradually withdrawn.

I can see two obstacles to this simple course of action.

First problem: Purists may object that our cities are subsidy junkies already; if the subsidy from central government is temporarily increased, it may be politically difficult to withdraw it later when conditions improve. I acknowledge this danger. It is an example of what, on January 20, Bank of England governor Mervyn King described as

the paradox of policy at present – almost any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term. Spending now supports the economy, but in the long run we need to save more and borrow less. Public borrowing sustains spending, but in the long run needs to fall. Banks are encouraged to run down their capital to enable them to absorb losses while continuing to lend, but in the long run they will need more capital. Interest rates have fallen to unprecedented levels, but in the long run will need to rise to more normal levels.

In the same way local government in the UK must be allowed to spend its way through this crisis, yet in the long term become fiscally more self-reliant. But there are ways to achieve this; for example, local authorities could take out loans from the Treasury with repayment contingent on local incomes or employment rates returning to their pre-crisis levels. But the time for complicated solutions may be already past; this is, after all, a crisis.

Second problem: The Westminster government may positively not want to do this. Whitehall is full of spending ministers. If there is to be a stimulus package, they will want to monopolize it and claim the credit for it. Scattering central funding across many local authorities, many (like Coventry) managed by parties that are in opposition in Westminster, may not look like the best way for Labour to prepare for the next general election. I suspect this is the most important obstacle to the action that our country needs. If so, it makes the failure to act even more scandalous.

Let me repeat: allowing local authorities to keep up their spending during the current recession is not a solution to the crisis. It is just a way to neutralize a mechanism for destabilization, one that is currently making the crisis worse than it needs to be.


February 03, 2009

False Patriots

Writing about web page http://news.bbc.co.uk/1/hi/uk_politics/7866614.stm

So a lot of people would like to send them home – the foreign workers contracted to work in Britain. To judge from the tone, these people are not that interested in a level playing field. They want one that puts the foreign workers on a steep slope – preferably down to the sea.

How much better can that get?

As far as I can work out, there are about six million British citizens living abroad. In the countries where they live and work, they take up jobs, homes, schools, medical facilities, and even benefits – just like foreigners here. In those countries, jobs are going to be just as short as they are here. So, if we succeed in sending the foreigners home, our compatriots abroad are going to be equally vulnerable to the same pressure from the citizens of the countries where they live.

I wonder if these "patriots" are ready to see tens or hundeds of thousands of British citizens forced out of the countries where they have made their homes and sent back here to crowd the jobless queues and social security offices. That is the predictable consequence if they succeed.

We live in an interdependent world. How hard it is for us to weigh the benefits against the costs. All of us benefit, but at any one moment the benefits are imperceptible because they come in thousands or millions of tiny packages. Export industries appear and jobs are created by the invisible hand. Moreover, we do not benefit equally; some gain more than others. And some lose, but each job that is lost is clearly identifiable. At moments of difficulty, our common interest in free trade and movement can be all too easily drowned out by the vocal lobbies that want to block these things.

Take "Buy American." The current amendment to the U.S. fiscal stimulus package before Congress will protect the jobs of a few thousand American steel producers. A hundred million steel consumer in the U.S. will lose in higher prices. It's tragic, but unsurprising, that the U.S. steel lobby could win this one.

The same applies to "Buy British." If we all buy only British, that will cut our imports – but it will also cut our exports! How will foreigners have the means to continue to buy the goods and services we export if we buy nothing from them?

Worse, we will become poorer as a result. "Buy British" will make us buy more of the expensive goods that we are least good at making ourselves. It will protect the jobs that are of least value. At the same time, it will undermine the markets for the goods and services that we are best at, and so add most value.

Take Coventry, where I live. Once, Coventry was Britain's Detroit. It produced motor vehicles for a mass market and exported them across the world. No longer. But Coventry has not dropped out of the world market. Our city has a new export industry: higher education. Two universities, Warwick and Coventry, bring thousands of students from across the world to study here. They pay high fees and living costs worth many tens of millions of pounds to the local economy. The money they spend doesn't come out of thin air; it is financed by the pounds their countries earn by selling goods to us, cheaper than we can make them ourselves – Korean motor vehicles, for example.

"Buy British" means killing Coventry's new exports. It means rolling the clock back from the new to the old -- giving up on what we do with greatest success, and going back to what we once could do but then failed in.

Folly that cloaks itself in patriotism is still folly.

We need all the major countries to cooperate to keep trade and [policy coordination going. On that note, Jeff Frieden has written something that everyone should read. Frieden's point is the importance of political leadership: our governments must create social consent at home and political agreement abroad keep open the channels of international trade and movement. He says:

At the domestic level, governments need to work out an equitable and politically sustainable allocation of austerity across the population.

This means ensuring that those sectors of society hit hardest by the crisis are not also the ones asked to bear the stiffest sacrifices. ... Governments that ignore the social and distributional implications of the crisis are likely to find themselves either driven toward extreme and counter-productive policies, or swept away.

At the international level, governments need to work just as consciously to coordinate not just words, but actions.

This will not happen of its own accord ...

I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).



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